Evidence for a Bitcoin TX Fee Market

For the past few months many of the people involved in the Bitcoin community have been arguing on how to increase Bitcoin’s current block size of 1MB, in order to accommodate bigger transaction volumes and avoid rising transaction fees. Despite the fact that these supposedly rising transaction fees often take center stage, it can easily be established that they are still far from an all-time high. From the graph below, which shows the average transaction fees in USD per transaction, we can even derive that 2015 actually had the lowest fee levels seen in the past few years, despite a surge in transaction volume.

But the previous doesn’t mean there is no reason for concern. In fact, it merely shows that in the past block size was never a relevant factor in determining the transaction fee level. If the average block size per transaction is added to the graph as below, it confirms that free block space has never been an issue until July 2015 when the number suddenly increases rapidly. This increase was the result of a flood attack on the Bitcoin network. The average block size has remained high and peaked several times since this “stress test”.

With blocks reaching their maximum capacity, block space became scarce and a relevant factor in determining the transaction fee level. Evidence for this can be observed by examining the changing correlation between block size and the transaction fees over time. The next graph shows the correlation between the average block size and the average transaction fee per transaction for different time periods. For this chart, the average transaction fees in BTC have been used rather than the converted USD fee level, in order to avoid the exchange rate becoming an additional variable to consider.

Unsurprisingly, the correlation coefficient remains negligible until the start of August 2015. After this moment, the block size does not only become relevant, but its correlation with transaction fees also intensifies quickly. This evidences that block size is related to the highs and lows observed in transaction fees over the past few months, while being well underway to becoming a main driver of transaction fees. By zooming in on the period after July 2015, we can get an even better view of transaction fee behavior during the most congested moments:

Altogether, current transaction fee levels might not show any dramatic impact (when compared to historic data) and therefore not raise much concern either, but this may be about to change soon as there is evidence for an emerging and quickly intensifying fee market due to Bitcoin reaching its maximum capacity.